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State Budget and Economy

The purpose of the state’s fiscal and economic policy is to create conditions for sustainable economic growth that improves the welfare and standard of living of the people.

Estonia mainly focusses on three areas: guaranteeing a stable economic environment; allocating budgetary funds for the improvement of economic growth and employment; and guaranteeing long-term sustainability.

The speed of Estonia’s real convergence has been fast and we are getting closer to the EU average. The risks and imbalance that increased during the period of rapid economic growth, which was based on the inflow of credit, have decreased quickly in the adaptation process that followed the financial crisis and reduced the further vulnerability of our economy.

Fiscal Policy of Estonia

Irrespective of the changes in the economic situation caused by the global credit crisis, the fiscal policy of Estonia has maintained its trustworthiness, and its support for the economy has allowed the state to recover from the crisis without any significant increase in government debt. Increasing economic flexibility, supporting the business environment and improving the efficiency of the labour market have become the key issues that will help guarantee sustainable economic development in the future.

The government is continuing to pursue a conservative fiscal policy, which means that the general government budget will be kept in structural surplus. A strict fiscal policy will ensure that a low level of government debt is maintained, which is a prerequisite for ensuring the long-term sustainability of public finances. This in turn reassures people that the services and support provided by the state will be guaranteed at all times.

Fiscal policy is linked to all state agencies, but the role of the Ministry of Finance is to coordinate and carry out fiscal policy planning. The Ministry of Finance plans the resources required for state agencies and coordinates their use within the scope of this role.

The area of fiscal policy covers:

designing and implementing the EU support and foreign aid policy, giving related advice;

protecting the state’s financial interests;

developing the financial framework of other general government institutions, incl. local authorities;

taking part in designing the EU budget.

The main partners of the Ministry of Finance in the area of fiscal policy are the Bank of Estonia, Statistics Estonia, the European Commission, the International Monetary Fund, the OECD and other state agencies. Activities in the area are closely connected with tax and administrative policy.

Every year the Ministry of Finance prepares the following in cooperation with other ministries and constitutional institutions:

the state budget for the following year, i.e. the state’s plan of incoming and outgoing money and other financial assets for one year;

the state’s budget strategy for the next four years, i.e. the medium-term view of the development of the state and sectors;

the stability programme, i.e. compliance of the government’s policy with the requirements arising from the Stability and Growth Pact.

The Ministry of Finance also prepares an economic forecast twice a year (in spring and summer), which is the basis on which the aforementioned documents are prepared.

State Budget

Budget procedures are put into practice in accordance with the Constitution of the Republic of Estonia and the State Budget Act. Budget formulation in Estonia can be divided into two stages: the preparation of the multi-year State Budget Strategy and the preparation of the annual budget.

State Budget Strategy

According to the State Budget Act, the State Budget Strategy is the basis for the compilation of the draft state budget and the State Budget Strategy shall be compiled for the following budgetary year and the subsequent three years.

The State Budget Strategy states:

the budgetary policy principles;

the priorities of the Government of the Republic and their activity based funding plan for these four years (including those in respect of the balance of the state budget and in respect of the state budget surplus or deficit);

an analysis of the economic situation and a forecast of economic development, including forecast of the expenditure of the general government;

other information that is essential for financial management.

The State Budget Strategy shall be approved by the Government of the Republic on the proposal of the Minister of Finance at least seven months before the beginning of the budgetary year.

The State Budget Strategy is drafted pursuant to the so-called rolling principle: in spring each year the former State Budget Strategy is updated with regard to the coming three years and making plans for the fourth year. This is how medium-term plans are adjusted in the constantly changing economic, fiscal and operational environment.

To that end the ministries and state authorities update the organisation-based development plan (that determine the public sector’s objectives and describe the results to be achieved by allocated means) of their area of government annually by one year, in order to ensure the constant four-year perspective in strategic planning.

The development plan of the area of government is approved by the minister, discussing it first with the Prime Minister and relevant ministers before approval. The development plans are submitted to the Ministry of Finance by March 1 each year, as a result of which the Ministry of Finance will conduct negotiations and draft the State Budget Strategy for discussion in the Cabinet. After the Cabinet has made a decision the Government of the Republic approves the State Budget Strategy.

The first document resembling a State Budget Strategy was made in Estonia in 2000. Two years later the annual obligation of drafting the strategy was provided for in the State Budget Act.

European Union Budget

The EU budget is funded by member states and the money is used to finance different activities and investments in member states (for example research, agriculture, infrastructure, culture, environmental protection etc.) More information on EU budget’s revenue, expenditure, rules and procedures can be found on EU Commissions DG Budget web-site.

Stratetic Planning and Government Finances in Estonia

Strategic planning is important tool for anticipating and preparing for the future challenges. Strategic planning activities in Estonia are regulated by the State Budget Act and by Government Regulation No. 302 dated 13 December 2005. The regulation lays out the types of strategic plans developed by the ministries and the procedures for preparing, amending, implementing, assessing and reporting them.

organisation-based development plans comprise the area of government of a ministry. They are directly linked to the State Budget Strategy and cover the upcoming budget year and the three following years. Each year, by the 1st of March, ministries update their development plan by one year in order to maintain a general four-year perspective. Realisation of organisation development plans is achieved through an annual action plan, which is a basis for planning the Annual State Budget Act.

There are ca 3000 institutions in the general government, from which 2700 are part of the local governments. Nevertheless, the largest level of the general government by the amount of revenues and expenditure is central government, whose revenues in 2011 amounted to 73% of the general government. A detailed list of all the entities in the general government can be found on the website of Statistics Estonia.